Powell Turns Hawkish Despite Omicron Variant. Last Tuesday, Jerome Powell took a hawkish stance on inflation, something markets haven’t seen since 2018. The move is unexpected as Omicron variant fear is causing markets to sell off, which Powell said has not been “baked into” the Federal Reserve’s forecasts. Instead, Powell is ditching the word “transitory” and wants to focus on dealing with “persistently higher inflation”. Chief US financial economist at Oxford Economics, Kathy Bostjancic, said the change is because “Inflation has front-run their plans. This is something they were not anticipating and now they need to pivot and calibrate policy in order to achieve their goals.”
Powell is clearly determined to tackle inflation before it becomes “entrenched” and said he would support a faster tapering, “perhaps a few months sooner”. The Fed planned to reduce its bond buying purchases by $15bn every month until it finished in July 2022. Barclays’ economists predict the Fed will accelerate tapering in January, meaning the programme would finish in April 2022. A former Fed staffer, Krishna Guha said, “this is a very abrupt pivot from the Fed: the eight-month taper plan was only announced four weeks ago and the New York Fed only began implementing it two weeks ago.” US stocks fell and the two-year yield climbed towards 0.55% from 0.44%.
US November Job Data Disappoints. On Friday, November US job growth slowed drastically and might change Powell’s opinion on a more rapid tapering which he supported in comments throughout the week. The US only added 210,000 jobs, much lower than Wall Street expectations of around 560,000 and October’s amount of 546,000. Wages were also below expectations, rising by only 0.3% this month and places the current annual wage growth at 4.8%. However, unemployment has improved rapidly, it currently sits at 4.2%. It was sat at 6% roughly six months ago. The justification for the weak data is COVID concerns and childcare issues are halting peoples return to work. Concerns may intensify with the new Omicron COVID variant and Powell said it could halt the labour markets’ progress.
The Bureau of Labour Statistics highlighted “notable” increases in some divisions, including 90,000 jobs in professional and business services, 62,000 in construction and manufacturing and 50,000 for transportation. Leisure and hospitality improved by 23,000 jobs, however, retail employment worsened by losing 20,000 jobs last month and currently sits at a loss of 1.3mn since before the pandemic. Education, mining and utilities had little change. Markets had little reaction to the report and waits to see if the Fed’s decision of greatly speeding up the withdrawal of stimulus will be altered.
Biden Urges Calm Over Omicron Variant. “This variant is a cause for concern, not a cause for panic,” Biden said. The Biden administration doesn’t believe new vaccines will be required, but is working on contingency plans with Moderna, Pfizer and Johnson and Johnson. Director at Pfizer, Scott Gottlieb said There’s a reasonable degree of confidence in vaccine circles that at least three doses, the patient is going to have fairly good protection against this variant.” However, Moderna’s Chief Medical Officer Paul Burton and Chief Executive Stéphane Bancel said the large number of mutations of the Omicron variant’s spike protein may elude current vaccines. 32 of the 50 Omicron mutations are in the spike protein, which vaccines target to boost immune systems. Bancel said “There is no world, I think, where the effectiveness is the same level that we had with Delta.” and “all the scientists I’ve talked to are like, ‘This is not going to be good’.” Moderna shares rose 12% in pre-market Monday following the statements.
WHO scientist Ana-Maria Henao-Restrepo, said 450 researchers are analysing Omicron from patient samples. Their findings will provide a clear picture of current vaccine effectiveness and may be known in a matter of days she said, or within the next two weeks.
Economic Calendar 6th November 3rd December
Data: UK Construction PMI (Nov), Germany Construction PMI
Events: BoE Broadbent Speech, Eurogroup Meeting,
Data: German ZEW Economic Sentiment (Dec), CAD Ivey PMI (Nov), JPY GDP (Q3), EU GDP (Q3)
Events: RBA Interest Rate Statement
Data: U.S JOLTS Job Openings (Oct), US Crude Oil Inventories, Brazil Retail Sales
Events: BoC Press Conference, RBA’s Governor Lowe Speech
Data: US Jobless Claims, China CPI, German Trade Balance
Events: RBA Bulletin
Data: UK GDP (Q3), UK Manufacturing Production (Oct), US Core CPI (Nov)
Events: Federal Budget Balance
US Core CPI
On Friday the 10th of December, the most recent US inflation data will be released. As inflation has been touching highs over the past months, there will be a lot of speculation surrounding this announcement. The core inflation rate is meant to reflect a more accurate marker figure, considering food and energy price changes. The previous core CPI data was 0.6% with the most recent forecasts suggesting a slight reduction to 0.5%. Deviation from this expectation will cause movements in the market, especially for the US’ securities.
Across the Atlantic, on Friday will be release the UK’s Gross Domestic Product data for the third quarter. With GDP directly measuring the inflation-adjusted growth of the economy, this is an accurate reflection of the UK’s economic performance for this quarter. The previous reading for Gross Domestic Product was 0.6%. As inflation is still increasing, it is expected that this reduced level of growth will continue. A strong growth would be reflected in a positive price change for the UK markets.
Thank you to Cameron Barker, George Fol and Mihai Golumbeanu for your in-depth analysis!